Question

Zimmerman Inc. manufactures a single product, CXW. Zimmerman uses budgets
and standards in its planning and control functions. Zimmerman makes use of its
standards in order to derive their budgeted cost per unit. For example, Exhibit A
provides information on the budgeted variable costs per unit. When determining
direct material costs for the planning budget income statement, the $12 budgeted
material cost per unit of CXW would be used in the calculation.

Exhibit A

Budgeted
(Standard)
Variable Costs Per
Unit of CXW
Raw material: 3 pounds at $4 per pound $12
Direct labor: 0.75 direct labor hours at $20 per hour 15
Variable overhead: 0.75 direct labor hours at $12 per hour 9
Total variable budgeted (standard) cost per CXW $36
__________________________________________________________________
The standards for fixed manufacturing overhead costs are: 0.75 direct labor hours
at $8 per hour. The standard fixed manufacturing overhead cost per hour is
calculated based on a denominator level of activity of 30,000 direct labor hours.
The planning budget income statement is based on the expectation of selling
40,000 units of CXW. The budgeted sales price is $65 per unit, and total budgeted
fixed selling and administrative costs are $500,000. There are no variable selling
and administrative costs in this firm.
The company actually produced and sold 36,000 units this year. The company
never has a beginning or ending raw materials inventory, because it uses all raw
materials purchased. Also, the company never has a beginning or ending finished
goods inventory. Everything produced in the year is sold in that same year.

3

The actual income statement for the year is provided in Exhibit B.
Exhibit B
_______________________________________________________________

Zimmerman Inc.
Actual Income Statement

Sales:
36,000 units produced and sold at $68 $2,448,000
Less Variable Costs:
Direct materials (100,000 pounds at $4.25 per pound) 425,000
Direct labor (32,000 direct labor hours at $18/hr.) 576,000
Variable manufacturing overhead 400,000
Contribution margin 1,047,000
Less Fixed Costs:
Fixed manufacturing overhead costs 280,000
Fixed selling and administrative costs 485,000
Net operating income $ 282,000
Required:
2) Prepare a detailed income statement variance analysis using the contribution
approach income statement (i.e., variable costing basis) for the year (i.e.,
compare the actual income statement with the flexible budget income
statement and compare the flexible budget income statement with the
planning budget income statement). Show all the revenue, spending, and
activity variances appearing in the income statement analysis. A template
for answering this question is given below. All variances should be marked
with either an “F” for favorable or “U” for unfavorable. (35 points)

Answer 1

2		Actual	Revenue & Spending Variances		Flexible Budget	Activity Variances		Planning Budget
	Activity -- units	36000			36000			40000
	Sales	2448000	108000	F	2340000	-260000	U	2600000
	Less Variable Costs:
	Direct Material	425000	7000	F	432000	-48000	U	480000
	Direct Labor	576000	-36000	U	540000	-60000	U	600000
	Variable Overhead	400000	-76000	U	324000	-36000	U	360000
	Contribution margin	1047000	3000	F	1044000	-116000	U	1160000
	Fixed Costs:
	Manufacturing	280000	-100000	U	180000	0	None	180000
	Selling and Administrative	485000	15000	F	500000	0	None	500000
	Net Operating income	282000	-82000	U	364000	-116000	U	480000
	Flexible Budget
	Sales	36000*2600000/400000	2340000
	Material	36000*12	432000
	Labor	36000*15	540000
	Variable OH	36000*9	324000
	Std Fixed Manufacturing OH	.75*8*30000	180000